PMI insurance, or Private Mortgage Insurance, protects the lender in the event that you default on your mortgage. It's not designed to protect you as a homeowner or a mortgagee. In some cases, you might not be able to get a home without it.
You Might Not Have a Choice
Lenders require PMI insurance if you borrow more than 80% of your home's value. If you can't afford a 20% down payment, you're stuck with PMI insurance. However, one way you can get around this requirement is to finance with two mortgages. If you can finance at 80-10-10, getting one loan for 80% of your home's value and a second loan for 10% of your home's value while paying the final 10% as a down payment, you may be able to avoid PMI insurance. Unfortunately, with tightening lender requirements, it's getting more difficult to borrow this much of your home's value.
High-Risk Lenders May Have to Pay More
PMI insurance is generally required on mortgages over 80% of your home's value. However, the Homeowner's Protection Act of 1998 (HPA) does include a provision for lenders to require PMI insurance for any loan over 50% of the home's value for high-risk loans. Non-conforming mortgages, reduced documentation mortgages or loans for people with a flawed credit history may fall into this high-risk category, and you may be required to have PMI insurance until your loan reaches 50% of your home's value. Consult your lender to determine whether your loan qualifies as high-risk and to determine how long you'll have to carry PMI mortgage insurance.
How PMI Insurance Works
PMI mortgage insurance is administered by a third party and is typically included in your mortgage payments. Your mortgage company collects your payment for PMI insurance and disburses the payments to the PMI insurer at the designated times to ensure you don't default on the PMI insurance and leave your lender unprotected.
You May Be Able to Cancel PMI Insurance
Under the HPA, you can cancel your PMI insurance when your loan reaches 80% of your home's value, if you meet a few specific requirements. You can't be more than 30 days late on a mortgage payment in the year prior to requesting cancellation. You can't be more than 60 days late within two years prior to requesting cancellation. If you have a mortgage in good standing, though, and your loan has reached 80% of your home's value, you can cancel your PMI insurance. If you don't cancel your PMI insurance manually at 80%, the lender is required to cancel it when your loan reaches 78% of your home's value, unless you're categorized as high-risk.
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